Misbehaving: The Making of Behavioral Economics

by Richard H. Thaler

The second obstacle is loss aversion. We know that people hate losing and, in particular, hate to see their paychecks go down. Based on the findings from our fairness study, we also know that in this domain, loss aversion is measured in nominal dollars, that is, without adjusting for inflation. So, if we could figure out a way that employees would not feel any cuts to their paychecks, there would be less resistance to saving more. The third behavioral insight was related to self-control. A key finding from the research on this topic is that we have more self-control when it comes to the future than the present. Even the kids in Walter Mischel’s marshmallow experiments would have no trouble if today they were given the choice between one marshmallow at 2 p.m. tomorrow or three marshmallows at 2:15 p.m. tomorrow. Yet, we know that if we give them that same choice tomorrow at 2 p.m., few would be able to wait until 2:15. They are present-biased.